Published on April 27, 1995
[FN]
* On beginning of year balances.
[FN]
* On beginning of year balances.
Management's Discussion and Analysis
Results of Operations
Revenues
Sales for the three fiscal years ended January 31 and the respective total and
comparable store percentage increases over the prior year were:
Total Comparable
Fiscal Sales Company Store
Year (in millions) Increases Increases
1995 $82,494 22% 7%
1994 67,344 21% 6%
1993 55,484 26% 11%
The sales increase of 22% in fiscal 1995 compared with fiscal 1994 was
attributable to 111 new stores, 6 new Supercenters, and 22 new Sam's Clubs;
sales from the relocation or expansion of 69 existing Wal-Mart stores into
Supercenters; comparative store sales increases of 7%; and the entry into
the Canadian market through the purchase of 122 stores from Woolworth
Canada, Inc., a subsidiary of Woolworth Corporation. Sam's Clubs sales as
a percentage of total sales increased by 1.1%, part of which is attributable
to the PACE units acquired in the fourth quarter of fiscal 1994. Supercenter
sales as a percentage of total sales increased by .5% and Canada store sales
accounted for 1.5% of total sales.
The sales increase of 21% in fiscal 1994 compared with fiscal 1993 was
attributable to 142 new stores, 1 new Supercenter, and 65 new Sam's Clubs;
sales from the relocation or expansion of 37 existing Wal-Mart stores into
Supercenters; comparative store sales increases of 6%; a 37% growth in the
sales of the McLane Company, and the acquisition of 99 PACE Clubs in the
fourth quarter. Sam's Clubs sales as a percentage of total sales decreased
by .3% while the McLane Company sales as a percentage of total sales increased
by .7%.
New Wal-Mart Stores and Sam's Clubs
1995 1994 1993
New Wal-Mart stores 111 142 161
New Supercenters 6 1
Wal-Mart stores relocated or expanded
to Supercenters 69 37 24
New Sam's Clubs 22 65 48
Acquired PACE clubs 99
Acquired Canada Woolco stores 122
New Canada stores 1
Costs and Expenses
Cost of sales as a percentage of sales increased .1% in fiscal 1995 as
compared with fiscal 1994 and decreased .3% in fiscal 1994 as compared with
fiscal 1993. The increase in fiscal 1995 is primarily due to a larger
percentage of consolidated sales attributable to Sam's Clubs resulting in
part from the addition of the PACE Clubs. The cost of sales in Sam's Clubs
is significantly higher as a percentage of sales than in Wal-Mart stores
due to a lower markup on purchases. The decrease in fiscal 1994 as compared
with fiscal 1993 was due to a larger percentage of consolidated sales
attributed to departments within Wal-Mart stores which have higher markon
percents and increases in markon percents in Sam's Clubs and McLane Company.
Operating, selling, and general and administrative expenses as a
percentage of sales increased .2% and .3%, respectively, in each of the last
two fiscal years when compared with the previous year. The increase in fiscal
1995 was primarily attributable to the acquisition of the Canada stores and
higher payroll and payroll-related benefit costs. The increase in fiscal
1994 was due principally to higher payroll and payroll-related benefit cost,
depreciation costs and certain occupancy costs in part attributable to the
Company's expansion program.
Interest Cost
Interest cost increased in fiscal 1995 and 1994 due primarily to increased
indebtedness in each of the years, which is attributable to the expansion
program. The cost of short-term borrowing increased as average short-term
borrowing rates increased approximately 1.4% in fiscal 1995 compared with
fiscal 1994. Interest cost will increase in fiscal 1996 with the additional
borrowing required to finance the expansion program. The Company may use
short-term borrowing arrangements to take advantage of the most favorable
financing rates. See Note 2 of Notes to Consolidated Financial Statements
for additional information on interest and debt.
Income Taxes
The effective income tax rate was 37.1% and 36.8% in fiscal 1995 and 1994
respectively. See Note 4 of Notes to Consolidated Financial Statements for
additional information on income taxes.
Liquidity and Capital Resources
Cash Flow Information
Cash flow provided from operations was $2.9 billion in fiscal 1995. These
funds, combined with the long-term borrowings of $1.3 billion and proceeds
from sale/leaseback transactions of $.5 billion, were used to finance capital
expenditures of $3.7 billion, acquire the assets of 122 Canada Woolco stores,
invest in international operations, pay dividends, provide working capital,
and fund the operation of subsidiaries.
Borrowing Information
The Company had committed lines of credit of $1,175 million with 11 banks and
informal lines with various banks totaling an additional $1,050 million which
were used to support short-term borrowing and commercial paper. These lines
of credit and their anticipated cyclical increases will be sufficient to
finance the seasonal buildups in merchandise inventories and interim
financing requirements for stores developed with sale/leaseback or other long-
term financing objectives.
The Company has aggressively expanded during the past three years. Even
though interest rates increased throughout fiscal 1995, the Company has taken
advantage of interest rates in the past three years which have been substan-
tially lower than those available in recent history. These favorable debt
market conditions, combined with the Company's ability to generate significant
cash flows from operations, have allowed it to continue this expansion and
position itself to continue as the world's largest retailer. These increased
borrowings to support the expansion programs have caused the Company's debt
(including obligations under capital leases) to equity ratios to increase
to .77:1 at the end of fiscal 1995, as compared with .75:1 and .56:1 at the
end of fiscal 1994 and 1993, respectively. In view of the Company's
significant working capital, its consistent ability to generate working
capital from operations and the availability of external financing, the
Company foresees no difficulty in providing funds necessary to fulfill its
working capital needs and to finance its expansion plans.
Foreign Currency Translation
The Company has operations in Mexico through a joint venture with CIFRA,
Mexico's largest retailer. In fiscal 1995 the value of the peso dropped
significantly in relation to the dollar, and accordingly the Company's
investment and shareholders' equity were reduced due to a foreign currency
translation adjustment of approximately $235 million related to the joint
venture in Mexico. The Company also had a foreign currency translation
reduction of approximately $21 million related to its Canadian operation.
The Company is evaluating strategies to reduce the risk of currency
devaluation. Although the Company is currently exposed to this risk, any
further devaluation of the peso or other currencies should not significantly
impact the Company's consolidated operations or financial position.
Expansion
The Company plans to continue to enhance its position as the world's largest
retailer through expansion in fiscal 1996. Expansion plans include 90 to
100 new Wal-Mart stores, 12 new Supercenters and 9 new Sam's Clubs along
with the expansion or relocation of approximately 70 Wal-Mart stores and
4 Sam's Clubs, and the conversion of approximately 80 Wal-Mart stores into
Supercenters.
The Company will continue to develop its interests in Hong Kong, China,
Argentina, Brazil and Canada with the planned addition of 20 to 25 new units.
With the recent devaluation of the peso, the Company has slowed its planned
expansion program in Mexico and will continue to evaluate future
opportunities.
Also included in expansion plans for fiscal 1996 are three distribution
centers. Total planned capital expenditures for 1996 approximate $4 billion.
The Company may sell $1,051 million of public debt utilizing shelf registra-
tion statements previously filed with the Securities and Exchange Commission.
Long-term and short-term borrowings along with cash provided from operations
should provide adequate funding for the Company's fiscal 1996 expansion
program.
Consolidated Statements of Income
(Amounts in millions except per share data.)
Fiscal years ended January 31,
1995 1994 1993
Revenues:
Net sales $82,494 $67,344 $55,484
Other income_net 918 641 501
83,412 67,985 55,985
Costs and Expenses:
Cost of sales 65,586 53,444 44,175
Operating, selling, and
general and administrative
expenses 12,858 10,333 8,321
Interest Costs:
Debt 520 331 143
Capital leases 186 186 180
79,150 64,294 52,819
Income Before Income Taxes 4,262 3,691 3,166
Provision for Income Taxes:
Current 1,572 1,325 1,137
Deferred 9 33 34
1,581 1,358 1,171
Net Income $ 2,681 $ 2,333 $ 1,995
Net Income Per Share $ 1.17 $ 1.02 $ .87
See accompanying notes.
Net Income
(Millions of Dollars) (Graph)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
327 451 628 838 1,076 1,291 1,609 1,995 2,333 2,681
Consolidated Balance Sheets
(Amounts in millions.)
January 31, 1995 1994
Assets
Current Assets:
Cash and cash equivalents $ 45 $ 20
Receivables 700 690
Recoverable costs from
sale/leaseback 200 208
Inventories:
At replacement cost 14,415 11,483
Less LIFO reserve 351 469
Inventories at LIFO cost 14,064 11,014
Prepaid expenses and other 329 182
Total Current Assets 15,338 12,114
Property, Plant, and Equipment, at Cost:
Land 3,036 2,741
Buildings and improvements 8,973 6,818
Fixtures and equipment 4,768 3,981
Transportation equipment 313 260
17,090 13,800
Less accumulated depreciation 2,782 2,173
Net property, plant, and equipment 14,308 11,627
Property under capital leases 2,147 2,059
Less accumulated amortization 581 510
Net property under capital leases 1,566 1,549
Other Assets and Deferred Charges 1,607 1,151
Total Assets $32,819 $26,441
Liabilities and Shareholders' Equity
Current Liabilities:
Commercial paper $ 1,795 $ 1,575
Accounts payable 5,907 4,104
Accrued liabilities 1,819 1,473
Accrued federal and state
income taxes 365 183
Long-term debt due within one year 23 20
Obligations under capital
leases due within one year 64 51
Total Current Liabilities 9,973 7,406
Long-Term Debt 7,871 6,156
Long-Term Obligations Under
Capital Leases 1,838 1,804
Deferred Income Taxes 411 322
Shareholders' Equity:
Preferred stock ($.10 par value;
100 shares authorized, none issued)
Common stock ($.10 par value;
5,500 shares authorized, 2,297
and 2,299 issued and outstanding
in 1995 and 1994, respectively) 230 230
Capital in excess of par value 539 536
Retained earnings 12,213 9,987
Foreign currency translation
adjustment (256) _
Total Shareholders' Equity 12,726 10,753
Total Liabilities and Shareholders'
Equity $32,819 $26,441
See accompanying notes.
See accompanying notes.
Consolidated Statements of Cash Flows
(Amounts in millions.)
Fiscal years ended January 31,
1995 1994 1993
Cash flows from
operating activities:
Net income $2,681 $2,333 $1,995
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,070 849 649
Increase in accounts receivable (84) (165) (106)
Increase in inventories (3,053) (1,324) (1,884)
Increase in accounts payable 1,914 230 420
Increase in accrued liabilities 496 327 176
Other (118) (55) 28
Net cash provided by operating
activities 2,906 2,195 1,278
Cash flows from investing activities:
Payments for property, plant,
and equipment (3,734) (3,644) (3,756)
Acquisition of assets from PACE
Membership Warehouses, Inc. _ (830) _
Acquisition of assets from
Woolworth Canada, Inc. (352) _ _
Sale/leaseback arrangements
and other property sales 502 272 416
Investment in international
operations (434) (198) (106)
Other investing activities 226 (86) (60)
Net cash used in investing
activities (3,792) (4,486) (3,506)
Cash flows from financing activities:
Increase (decrease) in
commercial paper 220 (14) 1,135
Proceeds from issuance of
long-term debt 1,250 3,108 1,367
Dividends paid (391) (299) (241)
Payment of long-term debt (37) (19) (8)
Payment of capital lease
obligations (70) (437) (60)
Other financing activities (61) (40) 16
Net cash provided by financing
activities 911 2,299 2,209
Net increase (decrease) in cash
and cash equivalents 25 8 (19)
Cash and cash equivalents at
beginning of year 20 12 31
Cash and cash equivalents at
end of year $ 45 $ 20 $ 12
Supplemental disclosure of cash flow information:
Income tax paid $1,390 $1,366 $1,173
Interest paid 658 450 317
Capital lease obligations incurred 193 162 286
See accompanying notes.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Segment information
The Company and its subsidiaries are principally engaged in
the operation of mass merchandising stores.
Consolidation
The consolidated financial statements include the accounts
of subsidiaries. Significant intercompany transactions have
been eliminated in consolidation.
Cash and cash equivalents
The Company considers investments with a maturity of three
months or less when purchased to be "cash equivalents."
Inventories
Inventories are stated principally at cost (last-in, first-
out), which is not in excess of market, using the retail
method for inventories in stores.
Pre-opening costs
Costs associated with the opening of stores are expensed
during the first full month of operations. The costs are
carried as prepaid expenses prior to the store opening.
Recoverable costs from sale/leaseback
All costs of acquisition and construction of properties for
which the Company plans to sell and leaseback within one
year are accumulated in current assets until properties are
sold.
Interest during construction
In order that interest costs properly reflect only that
portion relating to current operations, interest on borrowed
funds during the construction of property, plant, and
equipment is capitalized. Interest costs capitalized were
$70 million, $65 million and $80 million in 1995, 1994, and
1993, respectively.
Depreciation and Amortization
Depreciation and amortization for financial statement
purposes is provided on the straight-line method over the
estimated useful lives of the various assets. For income tax
purposes, accelerated methods are used with recognition of
deferred income taxes for the resulting temporary
differences.
Operating, selling, and general and administrative expenses
Buying, warehousing, and occupancy costs are included in
operating, selling, and general and administrative expenses.
Income taxes
In fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109) prospectively as a change in accounting principle
effective February 1, 1993. Under SFAS 109, the deferred tax
provision is determined under the liability method, whereby
deferred tax assets and liabilities are recognized based on
differences between financial statement and tax bases of
assets and liabilities using presently enacted tax rates. In
fiscal year 1993, deferred income taxes were provided on
timing differences between financial statement and taxable
income.
Net income per share
Net income per share is based on the weighted average
outstanding common shares. The dilutive effect of stock
options is insignificant and consequently has been excluded
from the earnings per share computations.
Stock options
Proceeds from the sale of common stock issued under the
stock option plans and related tax benefits which accrue to
the Company are accounted for as capital transactions, and
no charges or credits are made to income in connection with
the plans.
2. Commercial Paper and Long-term Debt
Information on short-term borrowings and interest rates is
as follows (dollar amounts in millions):
Fiscal year ended January 31, 1995 1994 1993
Maximum amount outstanding at
month-end $2,729 $2,395 $2,315
Average daily short-term
borrowings 1,693 1,247 1,184
Weighted average interest rate 4.4% 3.0% 3.5%
At January 31, 1995, the Company had committed lines of
credit of $1,175 million with 11 banks and informal lines of
credit with various banks totaling an additional $1,050
million, which were used to support short-term borrowings
and commercial paper. Short-term borrowings under these
lines of credit bear interest at or below the prime rate.
Long-term debt at January 31 consists of (amounts in
millions):
1995 1994
8 5\8% Notes due April 2001 $ 750 $ 750
5 7\8% Notes due October 2005 750 750
9 1\10% Notes due July 2000 500 500
5 1\2% Notes due September 1997 500 500
6 1\8% Notes due October 1999 500 500
5 1\2% Notes due March 1998 500 500
6 1\2% Notes due June 2003 500 500
7 1\4% Notes due June 2013 500 500
7 1\2% Notes due May 2004 500 _
7 8\10%-8 1\4% Obligations from sale/
leaseback transactions
due 2014 484 --
7%-8% Obligations from sale/
leaseback transactions
due 2013 322 335
8% Notes due May 1996 250 250
6 3\8% Notes due March 2003 250 250
6 3\4% Notes due October 2023 250 250
8% Notes due September 2006 250 _
8 1\2% Notes due September 2024 250 _
6 7\8% Eurobond due June 1999 250 _
5 1\8% Eurobond due October 1998 250 250
10 7\8% Debentures due August 2000 100 100
Other 215 221
$7,871 $6,156
Long-term debt is unsecured except for $220 million
which is collateralized by property with an aggregate
carrying value of approximately $358 million. Annual
maturities on long-term debt during the next five years
are (in millions):
Fiscal years ending Annual
January 31, maturity
1996 $ 23
1997 268
1998 523
1999 774
2000 806
Thereafter 5,500
The Company observes certain covenants under the terms
of its note and debenture agreements, the most restrictive
of which relates to amounts of additional secured debt and
long-term leases. The Company has entered into
sale/leaseback transactions involving buildings while
retaining title to the underlying land. These transactions
were accounted for as financings and are included in long-
term debt and the annual maturities schedules above. The
resulting obligations are amortized over the lease terms.
Future minimum lease payments for each of the five
succeeding years as of January 31, 1995 are (in millions):
Fiscal years ending Minimum
January 31, Rentals
1996 $ 81
1997 72
1998 76
1999 76
2000 104
Thereafter 1,109
The fair value of the Company's long-term debt
approximates $7,530 million based on the Company's current
incremental borrowing rate for similar types of borrowing
arrangements. The carrying amount of the short-term
borrowings approximates fair value.
At January 31, 1995 and 1994, the Company had letters of
credit outstanding totaling $580 and $808 million,
respectively. These letters of credit were issued primarily
for the purchase of inventory.
The Company has guaranteed the indebtedness of a joint
venture for the development of real estate in Puerto Rico.
At January 31, 1995, the amount guaranteed was approximately
$54 million. The Company does not anticipate any
joint venture defaults.
Under shelf registration statements previously filed
with the Securities and Exchange Commission, the Company may
issue debt securities aggregating $1,051 million.
3. Defined Contribution Plan
The Company maintains a profit sharing plan under which most
full and many part-time Associates become participants
following one year of employment. Annual contributions,
based on the profitability of the Company, are made at the
sole discretion of the Company. Contributions were $175
million, $166 million, and $166 million in 1995, 1994, and
1993, respectively.
4. Income Taxes
The Company prospectively adopted SFAS 109 as a change in
accounting principle effective February 1, 1993;
consequently, prior years' financial statements have not
been restated. Due to the nature of the predominant
cumulative differences in the Company's book and tax bases
of assets and liabilities, which relate to items that were
both timing differences under Accounting Principles Board
Opinion 11, "Accounting for Income Taxes" (APB 11), and
temporary differences under SFAS 109, the cumulative impact
of adoption was insignificant.
The income tax provision consists of the following (in
millions):
1995 1994 1993
Current:
Federal $1,394 $1,193 $1,002
State and local 178 132 135
Total current tax provision 1,572 1,325 1,137
Deferred:
Federal 7 30 31
State and local 2 3 3
Total deferred tax provision 9 33 34
Total provision for income taxes $1,581 $1,358 $1,171
Deferred income taxes under SFAS 109 reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Items
that give rise to significant portions of the deferred tax
accounts at January 31 are as follows (in millions):
1995 1994
Deferred tax liabilities:
Property, plant, and equipment $518 $408
Inventory 88 38
Other 8 9
Total deferred tax liabilities 614 455
Deferred tax assets:
Amounts accrued for financial
reporting purposes not yet
deductible for tax purposes 230 114
Capital leases 114 95
Other 33 18
Total deferred tax assets 377 227
Net deferred tax liabilities $237 $228
The components of the provision for deferred income
taxes under APB11 for the years ended January 31, 1993
are (in millions):
1993
Depreciation $ 68
Capital leases (21)
Other (12)
$ 35
A reconciliation of the significant differences between
the effective income tax rate and the federal statutory
rate on pretax income follows:
1995 1994 1993
Statutory tax rate 35.0% 35.0% 34.0%
State income taxes, net of
federal income tax benefit 2.7% 2.4% 2.9%
Other (0.6%) (0.6%) 0.1%
Effective tax rate 37.1% 36.8% 37.0%
5. Acquisitions
In two unrelated cash transactions during fiscal 1994, the
Company acquired selected assets of PACE Membership
Warehouses, Inc., including the right to operate 107 of
PACE's former locations, for $830 million, recording $336
million of goodwill which is being amortized over 25 years.
In fiscal 1995, the Company acquired selected assets
related to 122 Woolco stores in Canada from Woolworth
Canada, Inc., a subsidiary of Woolworth Corporation, for
approximately $352 million, recording $221 million of
leasehold and location value which is being amortized over
20 years. These transactions have been accounted for as
purchases, and the results of operations for the acquired
units since the dates of their acquisitions have been
included in the Company's results. Pro forma results of
operations are not presented due to insignificant
differences from the historical results.
6. Stock Option Plans
At January 31, 1995, 76 million shares of common stock were
reserved for issuance under stock option plans. The options
granted under the stock option plans expire 10 years from
date of grant and may be exercised in nine annual
installments. Further information concerning the options is
as follows:
Option price
Shares per share Total
Shares under option
January 31, 1992 13,618,000 $ .67-27.25 $142,763,000
Options Granted 4,072,000 $25.75-30.82 118,430,000
Options Cancelled (1,134,000) $ .67-30.82 (13,560,000)
Options Exercised (2,092,000) $ .67-27.25 (12,773,000)
January 31, 1993 14,464,000 $ 1.43-30.82 $234,860,000
Options Granted 3,550,000 $25.00-27.25 90,377,000
Options Cancelled (803,000) $ 1.43-30.82 (17,325,000)
Options Exercised (1,335,000) $ 1.43-30.82 (9,664,000)
January 31, 1994 15,867,000 $ 1.43-30.82 $298,248,000
Options Granted 4,125,000 $21.63-26.75 95,689,000
Options Cancelled (1,013,000) $ 1.43-30.82 (23,127,000)
Options Exercised (1,019,000) $ 2.08-27.25 (7,829,000)
January 31, 1995 17,969,000 $ 2.78-30.82 $362,981,000
(4,223,000 shares exercisable)
Shares available for option:
January 31, 1994 11,502,000
January 31, 1995 58,107,000
7. Long-term Lease Obligations
The Company and certain of its subsidiaries have long-term
leases for stores and equipment. Rentals (including, for
certain leases, amounts applicable to taxes, insurance,
maintenance, other operating expenses, and contingent
rentals) under all operating leases were $479 million in
1995, $361 million in 1994, and $313 million in 1993.
Aggregate minimum annual rentals at January 31, 1995, under
non-cancelable leases are as follows (in millions):
Fiscal Operating Capital
years leases leases
1996 $ 386 $ 252
1997 403 251
1998 386 251
1999 334 249
2000 318 247
Thereafter 3,155 2,785
Total minimum rentals $4,982 4,035
Less estimated executory costs 80
Net minimum lease payments 3,955
Less imputed interest at rates
ranging from 6.1% to 14.0% 2,053
Present value of net minimum lease payments $1,902
Certain of the leases provide for contingent additional
rentals based on percentage of sales. Such additional
rentals amounted to $42 million, $27 million, and $30
million in 1995, 1994, and 1993, respectively. Substantially
all of the store leases have renewal options for additional
terms from five to 25 years at the same or lower minimum
rentals.
The Company has entered into lease commitments for land
and buildings for 62 future locations. These lease
commitments with real estate developers or through
sale/leaseback arrangements provide for minimum rentals for
20 to 25 years, excluding renewal options, which, if
consummated based on current cost estimates, will
approximate $58 million annually over the lease terms.
8. Quarterly Financial Data (Unaudited)
Amounts in millions
(except per share information) Quarters ended
April 30, July 31, October 31, January 31,
1995
Net sales $17,686 $19,942 $20,418 $24,448
Cost of sales 14,063 15,960 16,201 19,362
Net income 498 565 588 1,030
Net income per share $ .22 $ .25 $ .26 $ .45
1994
Net sales $13,920 $16,237 $16,827 $20,360
Cost of sales 11,017 12,963 13,308 16,156
Net income 451 496 519 867
Net income per share $ .20 $ .22 $ .23 $ .38
Market Price of Common Stock
Fiscal years ended January 31,
1995 1994
Quarter High Low High Low
April 30 $29.13 $24.00 $34.00 $26.38
July 31 25.88 22.75 28.50 24.88
October 31 26.00 22.75 27.25 23.50
January 31 24.13 20.88 29.88 24.38
Dividends Paid Per Share
Fiscal years ended January 31,
Quarterly
1995 1994
April 14 $0.0425 April 9 $0.0325
July 8 0.0425 July 9 0.0325
October 3 0.0425 October 4 0.0325
January 5 0.0425 January 5 0.0325